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STOCK-BASED COMPENSATION - Note 7

6 Months Ended

Sep. 30, 2016

7. STOCK-BASED COMPENSATION

The following table summarizes stock-based compensation expense (in thousands):

		Three Months Ended				Six Months Ended
		September 30,				September 30,
		2016		2015		2016		2015
Cost of service revenue	$	440	$	263	$	800	$	482
Cost of product revenue		-		-		-		-
Research and development		863		726		1,750		1,257
Sales and marketing		1,751		1,422		3,666		2,619
General and administrative		1,454		1,106		3,343		2,181
Total stock-based compensation expense
related to employee stock options and
employee stock purchases, pre-tax		4,508		3,517		9,559		6,539

Tax benefit		-		-		-		-
Stock-based compensation expense
related to employee stock options and
employee stock purchases, net of tax	$	4,508	$	3,517	$	9,559	$	6,539

Stock Options, Stock Purchase Right and Restricted Stock Unit Activity

Stock Option activity under all the Company's stock option plans for the six months ended September 30, 2016, is summarized as follows:

			Weighted Average
	Number of		Exercise Price
	Shares		Per Share
Outstanding at March 31, 2016	4,793,266	$	6.29
Granted	308,560		14.40
Exercised	(318,197)		1.83
Canceled/Forfeited	(1)		2.58
Outstanding at September 30, 2016	4,783,628	$	7.11

Vested and expected to vest at September 30, 2016	4,783,628	$	7.11
Exercisable at September 30, 2016	3,085,831	$	5.80

Stock Purchase Right activity for the six months ended September 30, 2016 is summarized as follows:

			Weighted	Weighted
			Average	Average
			Grant-Date	Remaining
	Number of		Fair Market	Contractual
	Shares		Value	Term (in Years)
Balance at March 31, 2016	82,171	$	6.30	0.76
Granted	-		-
Vested	(65,006)		5.89
Forfeited	(250)		7.88
Balance at September 30, 2016	16,915	$	7.86	1.21

Restricted Stock Unit activity for the six months ended September 30, 2016 is summarized as follows:

				Weighted
			Weighted	Average
			Average	Remaining
	Number of		Grant Date	Contractual
	Shares		Fair Value	Term (in Years)
Balance at March 31, 2016	4,544,799	$	8.08	1.67
Granted	1,899,350		15.08
Vested	(868,648)		8.27
Forfeited	(141,143)		8.82
Balance at September 30, 2016	5,434,358	$	10.49	1.75

The following table summarizes stock options outstanding and exercisable at September 30, 2016:

	Options Outstanding						Options Exercisable
			Weighted	Weighted					Weighted
			Average	Average					Average
			Exercise	Remaining		Aggregate			Exercise		Aggregate
			Price	Contractual		Intrinsic			Price		Intrinsic
	Shares		Per Share	Life (Years)		Value	Shares		Per Share		Value
$0.55 to $4.26	995,448	$	1.44	1.9	$	13,930,587	995,448	$	1.44	$	13,930,587
$4.32 to $6.86	1,288,863	$	6.26	7.0		11,825,206	925,675	$	6.02		8,712,685
$7.52 to $8.93	973,650	$	8.28	8.6		6,963,536	333,871	$	8.23		2,403,471
$9.21 to $9.74	983,835	$	9.62	7.0		5,711,928	729,275	$	9.63		4,232,016
$10.50 to $15.18	541,832	$	12.92	9.1		1,361,380	101,562	$	11.10		439,646
	4,783,628				$	39,792,637	3,085,831			$	29,718,405

As of September 30, 2016, there was $52.6 million of unamortized stock-based compensation expense related to unvested stock options and awards which is expected to be recognized over a weighted average period of 2.26 years.

Unamortized stock-based compensation expense related to shares issued as part of a prior year acquisition was approximately $1.6 million, which will be recognized over a weighted average period of 2.67 years.

Assumptions Used to Calculate Stock-Based Compensation Expense

The fair value of each of the Company's option grants has been estimated on the date of grant using the Black-Scholes pricing model with the following assumptions:

		Three Months Ended				Six Months Ended
		September 30,				September 30,
		2016		2015		2016		2015
Expected volatility		42%		53%		44%		53%
Expected dividend yield		-		-		-		-
Risk-free interest rate		1.12%		1.59%		1.17%		1.59%
Weighted average expected option term		4.50 years		5.57 years		4.72 years		5.46 years

Weighted average fair value of options granted	$	5.46	$	4.00	$	5.46	$	4.06

The estimated fair value of options granted under the Employee Stock Purchase Plan was estimated at the date of grant using Black-Scholes pricing model with the following weighted average assumptions:

		Three Months Ended				Six Months Ended
		September 30,				September 30,
		2016		2015		2016		2015
Expected volatility		40%		45%		40%		45%
Expected dividend yield		-		-		-		-
Risk-free interest rate		0.45%		0.30%		0.45%		0.30%
Weighted average expected ESPP option term		0.76 years		0.75 years		0.76 years		0.75 years

Weighted average fair value of
ESPP options granted	$	4.04	$	2.78	$	4.04	$	2.78

As of September 30, 2016, there were approximately $0.5 million of total unrecognized compensation cost related to employee stock purchases. This cost is expected to be recognized over a weighted average period of 0.5 years.

Performance Stock Units

During the three and six months ended September 30, 2016, the Company issued restricted performance stock units (PSUs) to a group of executives with vesting that is contingent on both market performance and continued service. These PSUs vest (1) 50% on September 22, 2018 and (2) 50% on September 27, 2019, in each case subject to the performance of the Company's common stock relative to the Russell 2000 Index (the benchmark) during the period from grant date through such vesting date. A 2x multiplier will be applied to the total shareholder returns (TSR) for each 1% of positive or negative relative TSR, and the number of shares earned will increase or decrease by 2% of the target numbers. In the event 8x8's common stock performance is below negative 30%, relative to the benchmark, no shares will be issued. These PSU grants are included in the restricted stock unit activity disclosure for the six months ended September 30, 2016.

To value these market-based restricted performance stock units under the Equity Compensation Plans, the Company used a Monte Carlo simulation model on the date of grant. Fair value determined using the Monte Carlo simulation model varies based on the assumptions used for the expected stock price volatility, the correlation coefficient between the Company and the NASDAQ Composite Index, risk free interest rates, and future dividend payments.

Stock Repurchases

In February 2015, the Company's board of directors authorized the Company to purchase up to $20.0 million of its common stock from time to time until February 29, 2016 (the "2015 Repurchase Plan"). Share repurchases, if any, will be funded with available cash. Repurchases under the 2015 Repurchase Plan may be made through open market purchases at prevailing market prices or in privately negotiated transactions. The timing, volume and nature of share repurchases are subject to market prices and conditions, applicable securities laws and other factors, and are at the discretion of the Company's management. Share repurchases under the 2015 Repurchase Plan may be commenced, suspended or discontinued at any time. This tranche of shares authorized for repurchase expired in February 2016.

In October 2015, the Company's board of directors authorized the Company to purchase an additional $15.0 million of its common stock from time to time until October 20, 2016 under the 2015 Repurchase Plan. There were no stock repurchases for the six months ended September 30, 2016. The remaining authorized repurchase amount at September 30, 2016 was $15.0 million.